Our portfolio at 32

Hi all - long time lurker, first time poster

Very inspired reading about other investors' journeys on here and the wider goldmine of strategies / experiences etc so thought I would share our own - particularly where we sometimes lose sight of the end goal and could benefit from learning from others' mistakes! All properties are Sydney (I can sense the eye rolls but it just worked out that way!).

Started my investment journey in 2009 purchasing a 1 bedroom apartment (no parking) at Bondi Beach for $436k. Currently estimate $750k (conservative). Used the first home owner grants at the time to help acquire it @ 80% LVR, lived in for 6 months to qualify then rented it out.

In 2010 had Bondi revalued at $480k, pulled out the equity and incurred some LMI costs to purchase a 2 bedroom apartment (lockup garage) in Marrickville for $456k. Current conservative estimate is also $750k.

Given the debt levels, servicing and "life getting in the way" (including meeting my future wife) the investment path went quiet for a few years until 2014 when we purchased a PPOR in Leichhardt, a tiny 2 bedroom terrace (no parking) for $820k. Like the cliche you've all heard before, I distinctly remember how ridiculous we thought the price was. Local agent reckoned they would have no trouble selling it 6 months ago for $1.2m - $1.3m, I'm calling it $1.25m for now.

In 2016 we revalued again and pulled out some equity to buy a 2 bedroom apartment (lock up garage) in Kensington for $850k. Again, we couldn't believe that we were paying more for a tiny unit than we had for a terrace only 2 years before. Estimate current worth $900k.

We are currently assessing the portfolio to see whether there is an opportunity to pull some more equity out and "go again". We will need to stump up some cash as part of the deposit/purchasing costs given our current borrowing capacity, but we have sufficient cash reserves ($400k +) in an offset to do so while still leaving a healthy buffer. We are looking at a purchase of around $900k, again in Sydney - which I know has seen an awful lot of growth and most people are suggesting to look elsewhere, but given our investment horizon we are comfortable that being able to service the loan and hold on for 10 years + means we will see growth.

In a nutshell the 4 properties we currently hold are worth $3.65m combined with $2.43m of debt attached.

We would like to build up to achieving $100k passive income with the PPOR fully paid off. I estimate that will take at least 8 years from here, at which point we would be 40 (and likely no longer DINKS), although admittedly I haven't fully worked this though just yet - have been too focused on building an asset base!

Any comments / glaring issues we should look out for etc are most welcome. Along with any questions!

Cheers

 

Is the intent to live off rents of the other Sydney IPs (and have no debt attached to them)? If so, do you think you could pay off $2.4m in 10 years?

Am guessing the rents of the IPs are circa $2000 gross pw in today's dollars. Take 30% off that, then take another 20% off the remainder for tax. That's about $50-60K net.

 

Sounds like you are doing well.
Are you thinking about ownership structure and funding structure? Getting it wrong can be costly.
Remember to not use cash, but to debt recycle - after seeking tax advice.

Hows the land tax situation?

Getting a passive income from rents like that will be virtually impossible without selling something at some stage so plan for CGT minimisation.

Don't forget there is no rush to 'retire' and you might like to do some mini retirements along the way.

 

Hit it out of the park buying Eastern Suburbs and Inner West @Parkzilla Well done. Over $1mil in under a decade. Could convert that to a good $50k passive income now so you're half way there.

If you're gunning for $100k passive income in 8 years, consider if buying again in Sydney NOW makes sense though. If you see ZERO growth between now and age 40, how much closer to your goal will you be?

My thoughts would be to pull out whatever equity you can and use SOME to buy and reno or consider small developments (subdivision etc), ideally in growth markets, and retain a healthy buffer during the process.

p.s. What street is your Marrickville one on? I've got a few apartments and lived in the area for a decade. Great spot.

 

When factoring in your current portfolio worth, I assume that you are including your PPOR? Essentially you're in a position now where you could owe nil on your own home and around 95% on the other properties? I assume that you're probably fairly cash-flow neutral at this stage (depending on where the debt is sitting).

Given you intention to retire from the passive income, what LVR and portfolio size do you see making this achievable? Also, from what I see in Sydney, getting cash flow positive properties is pretty hard so if you're talking about holding for 10 years to see returns, where is the growth going to come from?

 

Well done; if you are no longer DINKS then you will need to think about proximity to schools and if going independent, then school fees. Mrs B works part-time to pay for one set of school fees.

 

Congrats @Parkzilla! Thanks for sharing your story. You've bought very well in Sydney.

You didn't buy my Marrickville unit by any chance did you? Top floor. Garage. Storage Cage.

 

Thanks for all the helpful replies! I'll answer these one at a time.

Hi Lacrim, yes intent would be to live off rent - although not necessarily with IPs being debt free (I don't think we would pay off $2.4m in 10 years) but with a much lower LVR. I figure over time with lower LVR (either by switching to P&I repayments / making additional repayments or selling off an IP to reduce overall debt) and increasing rents (expecting they will grow annually, albeit slowly) there will be enough surplus to start living off.

The rents are actually lower, close to $1,700 gross p/w.

 

Thanks Terry - these are the areas we are not really across as much as we should be. Ownership has been in joint individual names as we were more focused on borrowing capacity than anything else during acquisition phase. We definitely need to learn more about debt recycling!

Haven't looked into the land tax situation... certainly don't think we've paid any at this point. I'm guessing we need to register for it and be greeted by a nasty surprise.

CGT minimisation is something we also need to turn our minds to, as I guess you are right that we will eventually sell something (I've been avoiding thinking about it with the mantra of thinking "never sell").

Will definitely consider "mini retirements". Important thing is to find something you like doing so it doesn't feel so laborious!

PS: I see your sign-off says not taking any more clients. Can you PM me if that remains the case or recommend someone else?

Thanks

 

Yes I did factor in the PPOR in the portfolio worth / debt total. So you're right, we could liquidate the IPs to fully pay off the PPOR - but that would be akin to selling the golden goose (or geese in this instance)! Cash-flow is slightly negative (most of the debt sits on the IPs).

The second part is harder to answer - I guess we need to work backwards from the end goal to determine overall LVR & portfolio size. Time to do some sums!

As for growth, I think there will be both capital growth & rental growth over the next 10 years with Sydney - just much slower than we've had in the recent period. Hard to say though, people have been calling the Sydney peak for a long time and it's not like there's any more land becoming available in the inner/middle rings (meanwhile the population keeps going up). Wage growth is a worry though.

 

Absolutely. The devils in the detail.

 

Structuring doesn't necessarily mean using trusts or companies.

One simple method is to plan ahead and sell the main residence, tax free, and move into an investment property. Selling an investment property and paying down the main residence loan is good, but it could result in say $200,000 extra in tax. And that could delay retirement by about 4 years.

You ideally should plan ahead with this strategy by buying particular properties that you may want to live in in 10 years time. Otherwise you may not own something suitable.

An alterntive is to keep the exisitng main residence but to use the 6 year rule on an investment property and sell that tax free.

The idea is to set yourself up so that there is maximum flexibility so you could do either of the above (and more) if you decide to.

 

Living in the Leichhardt Terrace would definitely help in keeping the assessable Land Tax down.

That said you have ~$2.4M in investment properties for which you aren't currently paying land tax, but should be (given they are apartments so less land contribution, but expensive areas still).

Land Tax Free Thresholds:
2017 - $549,000
2016 - $482,000
2015 - $432,000

I wouldn't be surprised if your assessable rate of Land Tax is $10-15K/year now. If you haven't been paying it, you will have a backlog with possible penalties. You won't be able to claim the deduction when you have to pay for it in the future either.

I would get on top of that before adding more personally.

The properties you are buying are low yielding too if they are only netting $1700/week on $2.4M debt/valuation ~3.7% Gross Yield. So I wouldn't go too aggressive on LVR from this point forward. Net yield is going to be quite low considering Land Tax, high strata fees, management fee's etc.

I would be doing some sensitivity analysis before taking on more debt at this stage. Think what's your ability to handle an increase in rates? if you are all IO, can you handle getting forced onto all P&I & at higher rates, one person stopping work, etc.
Work out your debt service coverage ratio, etc.

Given how negative geared you are, a big part will come down to how big salaries are.

Edit: the $400K in the offset account does make things look a bit better.

 

Thanks for the comments bumskins, already getting on to the land tax issue.

What are your thoughts on shifting IO loans to P&I now given the rate differential (I'm with CBA)? I calculate I am paying $10k/year more interest on IO than I would be with P&I rates, so not an insignificant number. I don't understand why people avoid doing this using the argument that they will then have a smaller tax deduction: yes, because your bottom line is better off with the lower repayments!

 

I would only be IO on investment properties if I still had PPOR debt at these increasing spreads. Once its gone I would be looking to go P&I . You can extract equity again in the future when needed.
Realistically with a paid off PPOR it would be sitting in an offset account against one of the IP's reducing interest/deductions anyway.

 

even then it may not be worthwhile

 

Oh property chat. What have you done!! I had the audacity to click on a section I previously scoffed at... "Other Asset Classes"... and therein my attention was caught by a thread: Peter Thornhill.

Only up to page 16 (of 76) and I'm converted. Looks like the solution to (increasing) land tax and negative gearing/serviceability issues going forward as well as being more liquid and generating a more sustainable income to eventually retire on.

The question will be whether to refinance the existing IPs/PPOR and draw down the equity to fund the LIC purchases (in conjunction with some of the cash in the offset) or go wild and sell one/two off altogether to accelerate the initial LIC investment. Then there's structuring to think about (family / discretionary trust seems to be the way forward) before embarking on purchases.

I realise this may not qualify as an "investor showcase" moment in our journey, but putting it down as a marker of what may very well be a massive pivot in strategy.

 

as you said before, why sell the golden goose?

Something I have been thinking myself to free up equity to re-draw for further investment is to take some of my offset and pay down my PPOR loan. Then start a new investment loan. Question to those savvy finance types - does this sound like a sensible move (in principle) so as to minimise non-deductible debt (while maintaining probably the same level of overall debt)?

Cheers,
Inertia.

 

Better than using the cash to invest.
An alternative is to keep the cash in the offset and just borrow to invest against a property with equity.

 

I was wondering the same thing Inertia - effectively converting your offset funds into tax-deductible debt.

This is my preference but as I have surplus cash in the offset and not as much equity available to re-draw, I think the path will end up being paying down some of the PPOR with the cash and then refinancing with a separate LOC for share purchases. You end up losing access to some of those funds (i.e. dependant on LVR parameters for the LOC, you may have a ceiling of 60% - 80% available to re-draw) but perhaps this is a worthwhile trade-off for having a tax-deductible loan.